William G. Rosenberg79 John F. Kennedy StreetCenter for Business & GovernmentBelfer Center for Science & International AffairsKennedy School of Government, Harvard UniversityW: 617.495.0834 M: 919.601.0563 wrosenberg@e3ventures.com

Financing IGCC for Near-Term Deployment

Project Contacts:

Dwight C. Alpern

Legal & Regulatory Issues

Phone: (202) 343-9151

Fax: (202) 343-2356

Alpern.Dwight@epa.gov

July 2004

Michael R. Walker

Economic & Technical Issues

Phone: (720) 842-5345

Fax: (720) 851-5784

mwalker@e3ventures.com

2 Financing IGCC

IGCC Power Plant

Source: NETL

3 Financing IGCC

IGCC Deployment Rationale

Abundant domestic supply

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

Environmentally superior coal use:

4 Financing IGCC

U.S. Coal Resource

U.S. Coal DepositsWorld Coal Reserves

U.S.25%

Russia16%

China12%

India9%

Australia8%

Germany7%

S. Africa5%

Rest ofWorld18%

In contrast U.S. holds:

-- 2% of world oil reserves

-- 3% of world natural gas reserves

5 Financing IGCC

50,000

100,000

150,000

200,000

250,000

300,000

1950's 1960's 1970's 1980's 1990's '00-'02

Other

Renewable

Oil

Hydro

Nuclear

Natural Gas

Coal

Fuel Type

MW

Historic U.S. Capacity Additions

6 Financing IGCC

Projected Base Load Capacity Additions

2

4

6

8

10

12

14

16

18

20

ECAR ERCOT MACC MAIN MAPP NPCC SPP SERC WSCC

NERCRegions

Nuclear

CC Gas

Coal

EIA 2005-2015 Capacity Additions

GW

ECAR

ERCOT

MACC

MAIN

SPP

WSCC

SERC

MAPP

NPCC

7 Financing IGCC

Natural Gas Price Volatility

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003YTD

$/mmBtu

Natural gas

Coal

Average Delivered Fuel Prices to U.S. Electric Generators

8 Financing IGCC

Natural Gas Price Futures

NYMEX Henry Hub Natural Gas Futures (June 23, 2004)

-

1

2

3

4

5

6

7

8

07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12

2005 2006

$/mmBtu

9 Financing IGCC

Broad Support for IGCC

DOE — 25% coal reserves (vs. 2% oil & 3% natural gas)

NETL— invested $billions in CCT program (2 full-scale IGCC demonstrations)

EPA — sustainable coal utilization by reducing emissions almost to NG

Pres Bush — supports FutureGen, CO2 sequestration R&D

Congressman Barton — reduce pressure on natural gas prices

Environmentalists — cleaner air and potential for CO2 sequestration

Utilities — baseload capacity in a carbon constrained world

Coal producers — enhance market share, few coal plants built in last decade

NGCC owners — restore value by refueling to syngas

10 Financing IGCC

Emissions Comparison

0.5

1

1.5

2

SCPC1 IGCC2 NGCC1

NOx SO2 PM Hg

~80% 95%+

NOx SO2 PM Hg NOx SO2 PM Hg

~0 ~0 ~0

lb/MWh

Estimated New Plant Emissions Performance

1 Based on emissions levels in EPRI/NETL, Evaluation of Innovative Fossil Fuel Power Plants with CO2 Removal, Dec. 2002, SCPC and NGCC 7FA base cases.2 Levels proposed for qualification in 3 Party Covenant federal incentive program. Based on performance characteristics provided in NETL, Major Environmental Aspects of Gasification-Based Power Generation Technologies, December 2002; and performance estimates from Eastman Chemical Company.

11 Financing IGCC

IGCC Deployment Obstacles

Economics Higher Capital Cost (~20% higher than PC) Higher kWh energy cost

Perceived Technology Risks Construction overruns (EPC wrap??) Reliable performance (limited track record)

Declining Credit S&P utility credit rating from A to BBB (just above junk status) Debt reduction programs Write-offs and 20-30% sales

Skeptical Enviros “Off-coal” opposition and renewable & conservation priority CO2 sequestration skepticism Many opportunities to intervene and litigate

12 Financing IGCC

IGCC Financing Project Objectives

Access to capital

Share advanced technology risks

Produce competitively priced energy

Minimize federal costs

Deploy half-dozen IGCC plants in this decade

13 Financing IGCC

3-Party Covenant

PUC ApprovedRevenue Stream

Owner 20%Equity Investment

Federal 80% Debt Guarantee

IGCCDeployment

14 Financing IGCC

Roles of 3 Parties

-- AAA credit

-- Low interest rate

-- 80/20 capital structure

-- National security

-- Energy/ environmental resolution

-- Low risk scoring

Federal Government

Provides Receives

State PUC -- Assured revenue stream

-- Prudence review upfront

-- Reduce financial risk

-- Clean & reliable power

-- Competitive electricity prices

-- Jobs (construction & mining)

-- 20% equity

-- Leadership

-- No coal stigma

-- 80% non-recourse loan

-- Cost recovery (inc. CWIP)

Owner

15 Financing IGCC

Traditional Utility Financing 3Party Covenant

45% Equity(18.6%)

80% Debt

(5.5%)

20% Equity(18.6%)

Pre-tax weighted cost of capital:

11.9%

Pre-tax weighted cost of capital:

8.1%

80% debt lowers cost of capital over 30%

55% Debt

(6.5%)

16 Financing IGCC

IGCC Cost of Energy

36.5

22.6

8.0

8.0

10.9

10.9

10

20

30

40

50

60Trad. Utility Finance

$/MWh

3Party Covenant

O&M

FuelCapital

55.4

41.5

IGCC IGCC

3Party Covenant:

-- Adds 10% Operating Reserve Fund

-- Changes debt fraction & cost

-- 38% cost of capital reduction

-- 25% energy cost reduction

Overnight Capital Cost ($/kW) $1,400 $1,400

Fuel Cost ($/mmBtu) $1.25 $1.25

Capacity Factor 85% 85%

Heat Rate (btu/KWh HHV) 8,700 8,700

Debt Fraction 55% 80%

Debt Cost 6.5% 5.5%

Pre-Tax Equity Return 18.6% 18.6%

17 Financing IGCC

PC vs. IGCC 3Party Covenant Cost of Energy

31.336.5

8.0

8.0

10.9

10.9

10

20

30

40

50

60Traditional Utility Finance

$/MWh

3Party Covenant

O&M

FuelCapital

50.255.4

IGCC SCPC

22.6

8.0

10.9

41.5

IGCC

IGCC shown has:

-- 17% higherOvernight Capital Cost than PC

-- 10% higherenergy cost than PC with traditional financing

--17% lowerenergy cost than PC with 3Party Covenant financing

Overnight Capital Cost ($/kW) $1,400 $1,200 $1,400

Fuel Cost ($/mmBtu) $1.25 $1.25 $1.25

Capacity Factor 85% 85% 85%

Heat Rate (btu/KWh HHV) 8,700 8,700 8,700

Debt Fraction 55% 55% 80%

Debt Cost 6.5% 6.5% 5.5%

Pre-Tax Equity Return 18.6% 18.6% 18.6%

18 Financing IGCC

Minimize Federal Budget Cost

7.8

2.6

1.8

0.51

2

3

4

5

6

7

8

10-yr PTC1 30% Grant2 3 Party Covenant3

30-yr PTC1

$ billions

1 PTC = Production Tax Credit equal to 1.0 cent/kWh of generation (10-year PTC program provides significantly less economic benefit than the other programs that provide about 1 cent/kWh over 30 years). 2 Federal grant equal to 30 percent of total plant investment (equivalent to 0.96 cent/kWh of economic support for 30 years).3 Assumes 10 percent scoring of federal guarantees (equivalent to 0.95 cent/kWh of economic support for 30 years).

Budget Cost of 1 cent/kWh equivalent incentive (3,500 MW of IGCC)

19 Financing IGCC

NGCC refueling under 3Party Covenant

Convert to baseload plant Establish need for baseload power net of new PC

Long-term power purchase agreement

Inclusion by PUC in rates

New valuation Baseload 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

20 Financing IGCC

NGCC Refueling Cost of Energy

50.2

43.040.8

10

20

30

40

5050.2

43.040.8

10

20

30

40

50

SCPC NGCC Refueling*(CC 75% of par)

$/MWh

3Party CovenantTraditional

Utility Finance

NGCC Refueling*(CC 100% of par)

*Assumes 1% efficiency penalty & 5% Overnight Capital Cost penaltyin NGCC refueling scenarios vs. Reference IGCC.

21 Financing IGCC

Legislative Components

Program Scope 3,500 MW (about 6 projects) $5 billion guarantees $500 million scoring appropriations Accelerate deployment timetable

Federally Guaranteed Loan: 80%- AAA- 30yr

Environmental Performance 99% sulfur reduction with SO2 emission not to exceed 0.04 lb/mmBtu NOx emissions not to exceed 0.025 lb/mmBtu (5 ppm) Particulate stack emissions not to exceed 0.01 lb/mmBtu 95% mercury emissions control

DOE technology determination: Proven technical pathway for CO2 separation and capture, and for slipstream to

produce hydrogen

PUC determinations required to achieve low budget scoring

Operating Reserve Fund (10%) and Line of Credit (15%)

Pre-development engineering loans