Western RegionalAir PartnershipApril 5, 2006 Salt Lake City, Utah

David Berg U.S. Department of Energy,

Office of Policy & International Affairs andLoan Guarantee Program

www.ClimateVISION.gov

Understanding Gasification Incentives:

Risks, Benefits, & CostContext : “The Energy Investment Challenge”

2

Overview • Context: Drivers of Energy Policy

– The “Energy Investment Challenge” – Climate challenge– Enhancing energy security

“Business Cases for Commercial Deployment of...”• Business Case Team: DOE, DOD, EPA, plus Climate

VISION partners, other industry groups, and EPRI – Financial Advisors: Scully Capital Services, Inc.BASE CASE: Commercial prospects, sensitivitiesRISK: Findings from key risks questionnaireLIFT: Results from financial analysis of incentivesSCORING: Results of budget scoring analysis

3

The Energy Investment Challenge

IGCC at Tampa PECO

IGCC in Wabash, IN

4

The Energy Investment Challenge (IEA)“We don’t have an energy crisis, we have an energy investment crisis. We will need billions invested.”

Admiral Skip Bowman, Nuclear Energy Institute, 2005

Roughly $1,000 billion needs to be invested in North America each decade to meet energy demands, half of it in the electric sector.

World Energy Investment

Outlook, 2003IEA

For U.S. & Canada $Billions

$- $100 $200 $300 $400 $500

Oil - Explore & Develop

Oil sands, other

Oil Refining

Gas - Explore & Develop

LNG terminals

Gas Transmission

Gas Distribution / Storage

Coal - Mining

Electricity - Generation

Elec- Transmission

Elec- Distribution

2001-2010 2011-2020

Investments in energy efficiency are additional

For U.S. & Canada

5

Energy Insecurity: Driver for Energy Initiative

• Global oil consumption hit record high in 2004: 80 mm bbl/day. • Declining on-shore oil production for two decades [B].• Moratoriums intensified for off-shore drilling (e.g., Florida) [D].• U.S. imports >60% of oil consumption, most of it from unstable,

or even hostile, regimes. • Increasing terrorist threats at supply sources or choke points [C].• Steady erosion of global surplus of oil production and refining.• No new U.S. refineries built since 1976; several closed [A].• Local resistance to more LNG capacity + potential supply limits.

D

CAB

6

$12.00

$6.00

Oil, Gas Supply Constraints & Price Volatility

Crude OilAscent of crude oil prices in 2004-2005 threatens economic growth and provides a painful reminder of U.S. commercial vulnerability arising from the Nation’s dependency on oil imports.

Natural GasNatural gas price volatility, >100% variation in a year, is damaging key industries that depend on gas (e.g., chemicals, fertilizers, metals, cement). Stakeholders resist LNG terminals.

Market volatility hampers investment

$45.00

$70.00

7

Situation Briefing: Vulnerable Oil Sources

(green: state-owned)

Country Hostile to U.S. ?AramCo Saudi Arabia 260.0 …Not right nowNIOC Iran 125.8 Whenever possibleINOC Iraq 115.0 Your call… (Saddam out)KPC Kuwait 100.0 Nope; we saved ‘emPdVSA Venezuela 77.8 “Yanqui, go home”Adnoc UAE 55.2 No; new Navy baseLibya NOC Libya 22.7 Playing nice, but iffy NNPC Nigeria 21.2 Politically vulnerablePemex Mexico 16.0 Mostly in soccer Lukoil Russia 16.0 Nyet; Cold War over Gazprom Russia 13.6 Depends on Putin’s moodExxonMobil U.S. 12.9 Not to shareholders Yukos Russia 11.8 Under siegePetroChina China 11.0 NeutralQatar Petro Qatar 11.0 Nope; very friendly Sonatrach Algeria 10.5 Radical leaningsBP (Amoco) UK 10.1 Still see us as a colonyPetrobras Brazil 9.8 Not exportingChevronTexaco U.S. 8.6 SafeTotalfina France 7.3 They’re French !Imperial Oil Canada tar sands During hockey seasonSubtotal Biggest holders 916.3 Two-thirds held by OPEC

TOTAL ~1,200.0 (not including tar sands)

Energy Company

Reserves (Bil bbls)

Tanker “Prestige” off coast of Spain, Nov. 2002

U.S. imports ~ 60% of oil.

Source: Economist

Unstable Sources

Vulnerable Transit

State-owned energy companies control world oil reserves.

8

Situation Briefing: Oil Transit Chokepoints

D

CAB

Over 40 million barrels per day of oil moves by tanker.A significant volume of oil is traded internationally by oil tankers and oil pipelines. About 2/3 of the world’s oil trade (both crude oils and refined products) moves by tanker. About 43 million barrels per day – more than half of daily consumption– is crude oil. Tankers have made global transport of oil possible, as they are low cost, efficient, and extremely flexible.

On a clear day… you can see the Strait of Hormuz

Major chokepoints

Hurricane zone

Chokepoints in global oil transit pose a major threat to supplies.

What would an attack on a tanker yield?

U.S.S. Cole10-12-2000

9

Situation Briefing: Damage from Hurricanes

D

CAB

U.S. oil firms examine Katrina damage The U.S. Coast Guard reported at least 20 oil rigs or platforms missing in the Gulf of Mexico, while officials estimated 95 percent of regional oil and natural gas production and eight refineries along the coast remained shut down. Several crude pipelines on the Gulf Coast remained out of service due to power outages, damage and flooding, creating more strains for the sector. What's more, DOE said Port Fourchon in Louisiana, which handles a large share of U.S. crude oil and natural gas imports, was severely damaged by Hurricane Katrina and cut off by flood waters. In all, about 1.4 million bpd of crude production -- about 7 percent of domestic demand -- was down, and concerns about the lack of feedstock for refineries prompted the United States to offer to loan crude from its Strategic Petroleum Reserve to companies to replace lost output. The offer helped ease oil prices from record highs above $70 per barrel. But U.S. crude still remained at a red-hot $68.94 a barrel, down 87 cents from Tuesday when crude, gasoline and heating oil futures set record peaks.

• 20-25% of national oil & gas rigs shutdown;

• Nearly 60 rigs damaged in Gulf

• Several pipelines damaged, crimping supplies to other regions

• 8-10 refineries down, some more damaged than others; could take weeks or months

10

U.S. Power Plant Sector, 1950 – 2004

-

50,000

100,000

150,000

200,000

250,000

300,000

1950's 1960's 1970's 1980's 1990's ‘00-’04

OtherRenewableOilHydroNuclearNatural GasCoal

Sources: EIA, Form 860 for 2003; EIA, Electric Power Monthly, Nov. 2004, Table ES-3.

Actual capacity factor (<20%)

New power capacity by decade“Gas turbines were the easiest for air permits, so that’s what got built.”

Wave of NGCCs built since 1998 faces bankruptcy, mothballs, or low use due to high gas prices. Many new plants (not gas) are under study.

11

Business Case: Coal’s Lead Role in Power

By 2020, EIA forecasts that U.S. will still use coal for 45% – 50% of U.S. electricity…

Climate VISION:How do we best shift to coal gasification to reduce emissions and build “carbon capture” potential, or move to coal refining capacity?

EIA forecast for U.S. electricity generation, 2002 – 2020 (AEO 2004)

-

1,000

2,000

3,000

4,000

5,000

6,000

2002 2012 2020

Elec

tric

ity G

ener

ated

(Bill

ion

KW

hs)

Coal Nuclear Gas Dual fuel

Hydro Bio+MSW Wind Solar

2002 2012 2020

12

Reduce GHG Intensity, Enhance Security

• On February 14, 2002, President Bush set a near-term goal to reduce U.S. GHG emissions intensity —i.e., GHG per unit of GDP —18% by 2012.

• In January 2006 State of the Union address, the President called for action to end U.S. “addiction” to imported oil.

“My administration is committed to cutting our nation’s greenhouse gas intensity . . . by 18 percent over the next 10 years”

Climate Challenge

13

Challenge: CO2 Emissions by Sector, 2002

Electr

Resident

Comcl

Industr

Transp

Coal

Nuclear

Petro

N.Gas

0

100

200

300

400

500

600

Mill

ion

Tons

of C

arbo

n (M

tC)

CO2 emissions are concentrated in electricity, industry, & transportation sectors. Expanding nuclear reduces power’s GHG intensity. Programs in hydrogen, fuel cells, biofuels, and “Freedom Car” are aimed at the transport sector.

IGCC can play a role in alleviating gas shortages and building “carbon management” options.

Total CO2 from electricity shown, then allocated to residential, commercial, and industrial.

ElectricityTransport

Fuel SourceEnd-use

Sector

14

Climate VISION Contributes to Energy Security

Secure Supply Alternative supplies for fuels helps insulate users from import disruptions;Diversification of fuels (e.g. biofuels) and sources enhances options.

Less Price Volatility Alternative supply eases demand on natural gas, reducing price spikes;More stable generation or distributed generation moderates price swings.

Electricity Reliability Replacing an aging fleet with new plants and improved transmission systemsimproves emission control as well as enhancing overall reliability.

Energy Affordability Maintaining low cost energy and electricity supports competitiveness ofU.S. industry and reduces energy cost drag on U.S. households.

Source Flexibility Developing fuel and power options enables industry and consumersto adopt more efficient consumption patterns with lower emissions.

Modernization Upgrading grid and pipeline systems reduces disruptions and allowsfor smart adaptation to fend off shutdowns or bottlenecks, reduce emissions.

Energy Security goals (adapted from “Energy Challenges” in NEP, May 2001)

Climate VISION approaches contribute to overall energy security goals.

15

Climate VISION Contributes to Energy Security

DOEClimate VISION Approaches

All Industry work plans Low Med Med Low Med Med

FE Clean coal deployment Low Med High High High Low

EE EE in Residential Med Med High Low Low HighEE EE in Commercial Bldgs Med Med High Low Low High

RE Bioenergy / Biofuels High Med Low Med High Low

NE Expanded nuclear Med Med High Med Low Med

RE Acceleration of RE Low Med Med Low Low Med

TD Grid upgrades Low Med High High Low High

RE Smart Transportation High Med Low High Low MedRE Hydrogen Low Low Med Low High High

16

Commercial Applications: Plug-in Hybrids

Flexible-Fuel Plug-in Hybrids: Taking Charge to Reduce U.S. Oil ConsumptionTuesday, April 4, 2006 10:00 - 11:30 a.m. , 2318 Rayburn House Bldg.

Ford promises hybrid engines in half its lineup by 2010By Sharon Silke Carty, USA TODAY

DEARBORN, Mich. — 9/21/2005 — Ford Motor (F) CEO Bill Ford pledged Wednesday to make fuel-saving gas-electric hybrid power available in half the automaker's Ford, Mercury and Lincoln models by 2010, a big jump from just two hybrids now.

Briefings on the Hill

States Take Lead in Alternative Energy Source: Denver Post [Apr 03, 2006]

SYNOPSIS: Some 20 states now have "portfolio standards" that require utilities to increase their use of renewable sources.

DOE Battery Consortium

17

DOD’s “Clean Fuel” Initiative• To gain secure fuel supplies, DOD seeks domestic

commercial sources of synthetic clean fuels from, initially, coal gasification + Fischer-Tropsch.

• DOD will develop fuel specs; procure supplies of fuels for testing; and evaluate, demonstrate, certify, and, if successful, implement widespread use.

• DOE RD&D + government incentives offer catalytic production.

• Testing & use require commercial producers.• Industrial gasification and fuels co-production face

similar roadblocks as IGCC: high cost of production, plant reliability concerns, environmental uncertainties, financing difficulties.

• Collaborative analysis of risks and incentives can create synergies for DOD, DOE, EPA, states, and industry.

18

Energy Policy Act 2005 • $14.5 billion in tax benefits

+ other financial assistance• Provides incentives for

power and fuels from coal gasification, nuclear power, grid upgrades, energy efficiency, and renewable power and fuels

• Clarifies rules for siting power infrastructure and investment, and grid reliability

• Addresses climate challenge through sound voluntary actions and acceleration of technology

President George W. Bush signing H.R. 6, The Energy Policy Act of 2005, at Sandia National Laboratory in Albuquerque, NM, on Monday, August 8, 2005. Congressmen Ralph Hall (R, TX) and Joe Barton (R, TX), and Senators Pete Domenici (R, NM) and Jeff Bingaman (D, NM) also are on the stage.

August 8, 2005

May 2001

19

Specific EPAct 2005 Provisions

• Sec. 105: Expansion of Energy Savings Performance• Sec. 106: Voluntary agreements on industrial efficiency• Sec. 140: Energy efficiency pilots with 3 to 7 states • Sec. 202: Renewable energy production incentives• Sec. 638: Nuclear power plant risk insurance• Sec. 1222: Third-party agreements (Electricity) [SWPA,

WAPA]• Title XIII: Tax incentives (various)• Sec. 1510: Ethanol and motor fuel incentive• Sec. 1611: National Deployment Strategy on Climate• Sec. 1700: ”Incentives for Innovative Technologies”

– Loan Guarantees, plus S-1 authorities

EPAct provides DOE with a “toolkit” to promote energy investment.

20

Business Case for Commercial Deployment of Gasification with Co-Production

I. Define a base case gasification with co-production facility (Sponsor: DOE)

II. Develop and populate DOE's financial model for this base case co-production facility (Sponsor: DOD)

III. Analyze sensitivities for alternative plant configurations and product mixes (Sponsor: EPRI)

IV. Assess business risks and financing challenges of gasification with co-production facility development (Sponsor: ACC & GTC)

V. Analyze the business case for financial incentives for gasification with co-production projects (Sponsor: EPRI)

VI. Integrate findings in a summary report and presentation (Sponsor: DOE)

21

Risk: Analysis of Transaction Chain Views

Severity

Probability

RISKEVALUATION

22

Overview and Approach to Risk Assessment

Energy Project

Development Timeline

Risk Analysis of Project

Development Stages

Rating and Ranking of Risks by Stages

Evaluation, Application

of Risk Mitigation

Mechanisms

This diagram depicts the study’s logic flow and approach to the analysis.

$

$

Design & Development

Engineering &Construction

Operations &Maintenance

CloseFinancing

Permitting

Repayment and profit

possibledowntime

Regulatory and policy risks

Technical and operating risks

Market risks

$

$

Design & Development

Engineering &Construction

Operations &Maintenance

CloseFinancing

Permitting

Repayment and profit

possibledowntime

$

$

Design & Development

Engineering &Construction

Operations &Maintenance

CloseFinancing

Permitting

Repayment and profit

possibledowntime

Regulatory and policy risksRegulatory and policy risks

Technical and operating risksTechnical and operating risks

Market risksMarket risksCashTimeline

23

Incentives Can Best Be Tailored to RisksR

isk

Prof

ile

Plant Project Timeline Development & Engineering

Construction & Manufacturing Operations & Maintenance

• High capital costs• Regulatory uncertainty• Electricity competition

1. Not enough coverage of early operating risks. No coverage of poor technical performance.2. Too much risk coverage after successful operations: Buydown reduces end-use costs, but government “lift” is expensive.

Selection for DOE support $

Early Units

Impact of DOE buydown extends over life of systems.

24

Risk Ratings: Broad Set of IntervieweesExamples• GE, ConocoPhillips, Praxair, GTC• Bechtel, Fluor, Parsons, B&W • AEP, Cinergy, Duke, TVA• Excelsior, Baard, Tondu, TriGen• APPA coal group, NRECA• DOE, EPA, NETL• NARUC + OH, IL, IN, PA• NASEO + Coal boards, RDAs• Eastman, Peabody, Kennecott• CSFB, JP Morgan, SwissRe• S&P, Fitch, Moody’s• PJM, MISO• NRDC, CATF, WRI, EDF• UND-CEED, SIU, UK

Interviewee Categories1. Vendors & Tech firms2. Engineering contractors (EPCs)3. Utilities (regulated, merchants, hybrids)4. Independent power co’s (IPPs)5. Public Power & Co-ops6. Government agencies7. Public Utility Commissions8. State / Local Agencies (Comm; Devel)9. Fuel / Coal / Chemical companies10. Financial (Banks, Funds, Insurance)11. Rating agencies12. Transmission entities (TransCos)13. “Pragmatic” NGOs (vs. “ideologues”)14. Universities / Research centers

25

IGCC Risk Ratings 2005 – 1: Technical

0.0 5.0 10.0 15.0 20.0 25.0

High capital cost

High labor/operating cost

Excessive downtime

Poor tech performance

Lack of standardization

Lack of workforce to build

Lack of skilled operators

Lag in engineering progress

Damage from accidents

Thin EPC/vendor support

Waste disposal disruption

Rating of IGCC Risks (probability x severity)1) Technical Risks

Problem: standard IGCC system not resolved fully.

IGCC system not fully developed, and faces extra downtime early on to fine tune performance. Lack of EPC confidence shows up here.

40 ratings

Workforce issues are not rated as high risks.

Average

High capital cost and excessive downtime remain key risks, though lower than in 2004. Technical risk also ranks high.

26

IGCC Risk Ratings 2005 – 2: Regulatory

0.0 5.0 10.0 15.0 20.0 25.0

State air permitting on PC

Fed mercury regs favor PC

Fed SOx/NOx regs help PC

Little carbon capture value

IGCC reg tied to NGCC

No cost edge on CO2 sequest

No state policies for IGCC

Nat'l policy on IGCC lags

Rating of IGCC Risks (probability x severity)2) Regulatory Risks

Regulatory issues are not seen as "deal-killers", though doubts remain about national policy commitment and that carbon capture value will ever materialize.

40 ratings

Average

Concerns about state & national regulation of coal grew. Unclear advantages on emissions for IGCC pose an investment risk.

27

IGCC Risk Ratings 2005 – 3: Market

0.0 5.0 10.0 15.0 20.0 25.0

LT electric demand

Coal transport erosion

Old coal competition

Lower gas prices

Coal prices rise

Interest rates rise

PUC rate approval fails

Financing difficult

By-product revenue lags

IGCC customer fails

Rating of IGCC Risks (probability x severity)3) Market Risks

Vulnerability to interest rate rises is keyed to high capital costs; though some buyers have access to low rate debt. PUC approval (or long-term off-take) and financing are still viewed as problematic.

The competitive position of coal has improved with recent gas price spikes and volatility. "Old coal" poses some challenge, but not overwhelming because of its low efficiencies. Most believe that gas prices will stay higher now.

40 ratings

Average

IGCC units will be baseload, so PUC support would help with market risks. Financing difficulties are derivative from other risks.

28

Recap: Highest Risk Ratings (2004 v. 2005)High capital cost and excessive downtime remain high risks for all owner types. Critical regulatory issues (e.g., where IGCC carries advantages) are also a focus. Environmental (state, national) & utility commission policies are not well defined.

Risk Area for IGCC A B A x B 2004Highest Risks Probablty Severity Rating Rating

1 High Capital Cost 3.8 3.9 14.5 19.23 Excessive Downtime 3.5 3.7 13.1 15.28 Materials & Budget Overruns 3.3 3.5 11.2 10.410 EPC/Vendor Wrap 2.9 3.6 10.3 6.812 State Air Permitting on PC 3.8 3.5 13.3 10.915 Little Carbon Capture Value 3.4 3.2 10.8 10.818 No State Policies for IGCC 3.2 3.6 11.2 11.719 Nat'l Policy on IGCC Lags 3.2 3.7 12.0 13.726 PUC Rate Approval Fails 3.1 3.9 12.0 12.527 Financing Difficult 3.4 3.9 13.4 16.1

Overall Average 2.8 3.2 9.1 9.5

Q#

29

Risks & Responses: Observations• Top concerns remain constant: High capital cost and excessive

downtime. Will performance wraps be adequate? No signed deals yet leaving some uncertainty about price, terms.

• If federal government accepts significant technology (downtime) risk, then adequate EPC wrap probably could be negotiated with lower total cost.

• Concern about lack of clarity of state regulatory policies on conventional coal is rising, which adds risk for competitiveness of IGCC plants. This risk jumped the most since last year.

• Risk of natural gas prices dropping was rated lower than 2004, but carries big impact. Even with Eastern coal prices rising, IGCC can compete.

• Owners remain skeptical that carbon capture advantages will materialize by 2010. IGCCs have edge on mercury; but, CAMR is in litigation.

• Concerns about coal transport constraints doubled, but are not high yet.• Lack of clarity that PUCs will accept high capital costs to gain long-term

emissions and rate stability remains of concern. • Workforce issues (for construction and operation) rate low.

30

IGCC Range of LCOE Benefits for IOUs ($/MWh)

• Tax incentives provide the most “lift” for IOUs, tracking well with EPRI findings.

• IOU results are less sensitive due to normalization process embodied in rate making.

• The “juice” in the 3Party Covenant is tied to its “leveraged return” assumption.

IOUBenefits: $ / MWh 55 / 45

Cost of equity 11.5%

Structural IncentivesLoan guarantee $0.58Direct loan $1.713Party Covenant (no leverage) $0.323Party Covenant (with leverage) $10.52

Tax IncentivesProduction tax credit (0.9 c / KWh) $4.04Investment tax credit (20% on gasifier) $3.14Tax credit bonds N / A

31

Range of LCOE Benefits for Merchant Power ($/MWh)

Benefits: $ / MWh 60 / 40 60 / 40High IRR ( 15% )

Low IRR ( 13% )

Structural IncentivesLoan guarantee $0.31 $4.40Direct loan $1.38 $5.423Party Covenant (no leverage) $3.58 $6.773Party Covenant (with leverage) $15.48 $16.95

Tax IncentivesProduction tax credit (0.9 c / KWh) $6.38 $9.57Investment tax credit (20% on gasifier) $1.18 $4.90Tax credit bonds N / A N / A

Merchant

MPPs and IPPs exhibit more LCOE sensitivity than IOUs.– Reflects “price taker” status and dynamic tax effects.

• Both types of incentives benefit MP

• MP producers are more cash-flow driven than IOUs

• Ratepayer / owner benefit tradeoff (IRR vs. LCOE)

32

IGCC Range of LCOE Benefits for IPPs ($/MWh)

Benefits: $ / MWh 70 / 30 70 / 30High IRR ( 17% )

Low IRR ( 15% )

Structural IncentivesLoan guarantee $7.96 $10.27Direct loan $9.41 $11.683Party Covenant (no leverage) Not done Not done3Party Covenant (with leverage) $15.77 $17.31

Tax IncentivesProduction tax credit (0.9 c / KWh) $5.08 $8.90Investment tax credit (20% on gasifier) $2.68 $5.67Tax credit bonds N / A N / A

IPP

MPPs and IPPs exhibit more LCOE sensitivity than IOUs.– Reflects “price taker” status and dynamic tax effects.

• Structural tools benefit leveraged IPPs due to lower interest rates, higher leverage—and better access to debt.

• Tax incentives provide less “lift”.

33

Incentive Benefit/Cost Ratio and Rank

• Despite modest benefits for IOUs, credit incentives tend to be cost efficient relative to tax incentives.

• Accelerated Depreciation stands out among tax-based incentives.• 3 P Covenant efficiency is tied to leverage and initial credit rating

assumption.

Ratio Rank Ratio Rank Ratio Rank Ratio Rank

Loan Guarantee 4.23 4 3.05 6 11.65 2 N/A N/ADirect Loan 12.50 2 4.49 4 13.88 1 N/A N/A3Party Covenant w Leverage 230.00 1 7.83 1 6.97 3 N/A N/A

3Party Covenant w/o Leverage 10.67 3 3.07 5 N/A N/A N/A N/A

Production Tax Credit (0.9¢/KWh) 1.18 10 2.05 9 2.05 8 N/A N/A

Production Tax Credit (1.80¢/KWh) 1.19 9 2.38 7 2.61 7 N/A N/A

Accelerated Depreciation 3.04 5 4.76 2 6.41 4 N/A N/AInvestment Tax Credit (20% on Gasification Portion) 2.34 7 2.28 8 3.12 6 N/A N/A

Tax Exempt Bonds 1.96 8 N/A N/A N/A N/A N/A N/ATax Credit Bonds N/A N/A N/A N/A N/A N/A 1.77 1ITC and AD 2.95 6 4.73 3 5.88 5 N/A N/A

Credit-Based Incentives

Tax-Based Incentives

Public Power

Incentive

Investor Owned Utility

Merchant Power Producer

Independent Power Producer

34

Sample Output Graph

- - - - -0.3

2.0

3.2

5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7

Cash Flow Under Baseline Conditions

Cash Flow Under Worst Case Scenario

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

($ M

illio

ns)

Debt Service Cash Flow Under Baseline Conditions Cash Flow Under Worst Case Scenario

35

Budget Scoring Factors (per FCRA)

Reduces Scoring• Robust independent credit

rating (S&P, Moody’s, Fitch)• Short term of guarantee• More equity financing• Very strong off-takers or PUC

support / mandate• Confined terms for trigger• Additional collateral or

recovery • Superior rights in liquidation• Tighter payment terms• Higher interest rate or fees• Solid environmental permits

Increases Scoring• Weak credit rating, or below

investment grade• Longer term of guarantee• Less equity from owners• Weak off-take agreements

and/or tepid PUC support• Broader terms for trigger• No collateral beyond project

assets• Inferior liquidation position• Liberal payment terms• Lower interest rate or fees • Questionable permit status

36

Cooperation Is Important• DOE-supported and industry-supported RD&D.• Testing and commercial use to produce changes in energy

economy.• Early adopters face extra risks: e.g., high cost of production,

plant reliability concerns, environmental uncertainties, financing difficulties.

• Government incentives offer catalytic value.– Federal incentives (EPAct tax credits & loan guarantees, EPA,

DOD fuel purchase contracts)– State PUC, economic development, environmental actions

• Collaborative analysis of risks and use of incentives can create synergies for Federal government, states, and industry.

37

Wrap-up: Discussion Thoughts

• There are many drivers for energy policy – emissions are a key driver – but not the only one (energy security, economy).

• Climate VISION aims at addressing GHG emissions and energy security via partnerships with entire sectors.

• Federal incentives within EPAct can play a critical role in addressing energy, economic and environmental goals.

• The “Energy Investment Challenge” means that Federal incentives must be targeted and used artfully.

• Expanding our domestic base in coal gasification provides a strategic capacity for carbon capture over several decades.

• Western states have vast, affordable coal resources and are experiencing the greatest demographic demand for power and transportation fuels. The future is now.

38

Backup slides

39

Plant Cost and Configuration AssumptionsTechnical Parameters

Net Capacity 520 MWe (600 MWe gross) Net Heat Rate 8600 Btu/kWh Coal Type Pittsburg 8 Spare Gasifier Yes SOx Control Technology MDEA (Methyl Diethanol Amine) SCR Included No Construction Time 3 Years In Service Date 2009 Plant Life 30 Years

Capital Costs (in 2004 Dollars) Plant Costs $839 Million Financing and Development $122 Million Other $ 19 Million TOTAL $980 Million

Operating Parameters (in 2004 Dollars) Fixed Costs $30.2 Million / Year Insurance Costs $3.6 Million / Year Property Costs $10.9 Million / Year Variable Costs 0.9 mills / KWh CAIR and CAMR Compliance Costs 0.7 mills / KWh to 0.95 mills / KWh Fuel Costs $1.5 /MBtu Availability Ramp-Up in Years 1,2,3 60%, 70%, 80% Availability in Steady State (Year 4 onward) Average Availability Over Project Life

90% 88%

Environmental Performance Net Emissions SOx 0.0321 lb/MMBTU Net Emissions NOx 0.0621 lb/MMBTU Net Emissions Mercury 0.84 lb/Trjllion BTU Net Emissions Carbon Dioxide 203 lb/MMBTU

$839 = $1400 600 per KWe

$980 = $1885 520 per KWe

40

Financing Assumptions

Financing Assumptions: Investor Owned Utility

Merchant Power Producer

Independent Power Producer Public Power

Capital Structure: 45% Equity, 55% Debt 40% Equity, 60% Debt 30% Equity, 70% Debt 10% Equity, 90% Debt

Interest Rate: 6.5% 8% 8% 5%

Amortization: Level Principal Mortgage Style Mortgage Style Level Principal

Loan Term: 30 Years 20 Years 20 Years 30 Years

Reserves: No Reserves Specific to Project

No Reserves Specific to Project Debt Service Reserve No Reserves Specific

to ProjectAllowance for Funds Used During Construction:

Recovered in Rates N/A N/A N/A

After-Tax Equity Internal Rate of Return (Range):

N/A 13% - 15% 15% - 17% N/A

Return on Equity: 11.5% N/A N/A N/A

Weight Average Cost of Capital: 7.3% 8.1% 7.9% 5%

Marginal Income Tax Rate: 39.2% 39.2% 39.2% N/A

Tax Loss Benefits: Utilized Currently Utilized Currently Utilized Currently N/A

41

Federal Deficit Poses Fiscal ChallengesFallout from 9/11, recession, stock market slump amplified deficit.

http://www.cob.gov

42

Range of Benefits in LCOE ($/MWh)

• IOU results track well with EPRI findings.• MPPs and IPPs exhibit more LCOE sensitivity than IOUs.

– Reflects “price taker” status and dynamic tax effects.• IOUs less sensitive due to normalization process embodied in rate making.• The “juice” in the 3 Party Covenant is tied to a “leverage return” assumption.

IOUBenefits: $ / MWh 55 / 45 60 / 40 60 / 40 70 / 30 70 / 30

Equity at 11.5%

Low IRR 13%

High IRR 15%

Low IRR 15%

High IRR 17%

Structural IncentiveLoan Guarantee $0.58 $0.31 $4.40 $7.96 $10.27Direct Loan $1.71 $1.38 $5.42 $9.41 $11.683-Party covenant (no leverage) $0.32 $3.58 $6.77 Not done Not done3-Party covenant (with leverage) $10.52 $15.48 $16.95 $15.77 $17.31

Tax IncentiveProduction Tax Credit (0.9 c / KWh) $4.04 $6.38 $9.57 $5.08 $8.90Investment Tax Credit (20% on Gasifier) $3.14 $1.18 $4.90 $2.68 $5.67Tax Credit Bonds N / A N / A N / A N / A N / A

Merchant IPP

Levelized Cost of Electricity