william g. rosenberg 79 john f. kennedy street center for business & government belfer center...

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 [email protected]

Gasification as a Strategic Energy and Environmental Option

Project Contacts:

Dwight C. Alpern

Legal & Regulatory Issues

Phone: (202) 343-9151

Fax: (202) 343-2356

[email protected]

February 2005

Michael R. Walker

Economic & Technical Issues

Phone: (720) 842-5345

Fax: (720) 851-5784

[email protected] available at:www.ksg.harvard.edu/bcsia/enrp

2 Gasification as a Strategic Option

U.S. Coal, Pet-Coke, Biomass Resources

Drivers

Anthracite

Bituminous

Sub-Bituminous

Lignite

Coal Deposits

Petroleum Coke Production

Biomass Resources


Global Climate Change Challenge

2004 U.S. CO2 Emissions

By Fuel Source

World CO2 Emissions

10

20

30

40

1990 2000 2010 2015 2020 2025

United States

W. Europe

Other Industrial

Fmr USSR/E. Europe

China

India

Other Developing

Source: EIA, International Energy Outlook 2004.

Billion metric Tons CO2

Coal36%

Oil43%

Natural Gas21%

Coal36%

Oil43%

Natural Gas21%

Drivers

5.8 billion metric tons CO2


Natural Gas Price Outlook

$/mmBtu Average Delivered Fuel Prices to US Electric Generators

1

2

3

4

5

6

7

1990 2000 20101995 2005 2015 2020 2025

Historic Projected (EIA Annual Energy Outlook 2005 Reference Case)

Natural Gas

Coal

(EIA Annual Energy Outlook 1997 Reference Case)

1997 Natural Gas Price Forecast

Drivers


96% of Capacity Built Since 2000 Natural Gas

50,000

100,000

150,000

200,000

250,000

300,000

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

Other

Renewable

Oil

Hydro

Nuclear

Natural Gas

Coal

U.S. Net Summer Capacity Additions by On-Line Date

Sources: EIA, Form 860 for 2003; EIA, Electric Power Monthly, November 2004, Table ES3.

MW

Drivers


TCF Demand from NGCC Fleet

NGCC Fleet Average Capacity Factor

1.0

1.7

2.3

3.0

3.7

4.3

5.0

1

2

3

4

5

15% 25% 35% 45% 55% 65% 75%

TCF

Current

Drivers


Industry Needs Gasification Option to Stay in U.S.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1997 1998 1999 2000 2001 2002 2003 2004

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Avg. Industrial Price ($/Mcf)

Industrial Consumption (TCF)

TCF$/Mcf

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.

Gasification Opportunities & Challenges


Natural Gas Challenge

Sources: Historic data: EIA, Annual Energy Review 2003, Table 6-1; Projections: EIA, Annual Energy Outlook 2005, Table A-14.

Imports

0

5

10

15

20

25

30

35

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Domestic Consumption

Domestic Production

Domestic Consumption

Domestic Production

Actual Projected

TCF

Drivers


U.S. Incremental Natural Gas Supply—LNG Imports

5

10

15

20

25

30

35

2003 2010 2015 2020 2025

TCF

Canada & Mexico

Lower 48 on-shore production

Lower 48 off-shore production

Alaska

LNG Imports

Source EIA, Annual Energy Outlook 2005

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

Drivers


IGCC Technology

Source: NETL

Shift & CO2Capture

CO2



Gasification offers clean alternative

0.5

1

1.5

2

SCPC IGCC NGCC

NOx SO2 PM Hg

~80% 95%+

NOx SO2 PM Hg NOx SO2 PM Hg

~0 ~0 ~0

lb/MWh

Estimated New Plant Emissions Performance



Gasification Deployment Challenges

Environmental Groups

IGCC alone is progress,

but must be tied to a

commitment for carbon

capture and storage

State Regulators

We are worried about

higher costs and

technology risks…

remember nuclear

power?

•Environmental Groups

•State Regulators

•Coal Companies

•Generating Companies

•Technology Vendors

•Bankers Coal Companies

IGCC is the technology

of the future, but nothing

should interfere with

current plans to build

more PC

Generating Companies

We can’t assume all of the

technology risk so this

must be a regulated assetor

We want to be the 5th company to deploy IGCC

Technology Vendors

IGCC technology is

commercially ready, but

we are not yet able to

provide full warranties

Bankers

Too much risk for

merchant financing –

financing requires strong

credit and backup

protections



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

Deployment Incentives


Gasification—Domestic Supply Option


5

10

15

20

25

30

35

2003 2010 2015 2020 2025

T C F

C an ad a & M exico

L o w er 4 8 o n -sh o re p ro d u c tio n

L o w er 4 8 o ff -sh o re p ro d u c tio n

A lask a

L N G Im p o r tsGasification


Traditional Utility Financing

80% Loan Guarantee Financing

Debt

(5.5%)Equity(18.6%)

11.9%

8.1%

Lower Cost of Capital

Equity(18.6%)

Debt(6.5%)

Lower interest rate 5.5% vs. 6.5%

Higher leverage

80% vs. 55% debt

Lower cost of capital

Lower cost of energy



New Plant Cost of Energy Comparison

3.133.65

0.8

0.8

1.09

1.09

1

2

3

4

5

6

Traditional Utility Finance

cent/kWh

5.025.54

IGCC SCPC

2.26

0.8

1.09

4.15

IGCC

80% Loan Guarantee

O&M

Fuel

Capital

NGCC*

7 6.52

2.06

4.08

0.25

* $6.20/mmBtu natural gas, 50% capacity factor.



Lower fuel & electricity prices

1

2

3

4

5

6

7

1

2

3

4

5

6

7

EIA Projected 2005 Delivered

Natural GasPrice

Est. ManufacturedGas Cost withFederal Loan Guarantees

NGCC ElectricityCost at EIA

Natural Gas Price

IGCC ElectricityCost with FederalLoan Guarantees

$/mmBtu fuel cost Cent/kWh electricity cost

6.2

4.3

6.5

4.15



Federal budget cost

NPV federal budget cost of equivalent incentives to support gasification equal to 1.5 TCF


2.2

11.8

32.4

5

10

15

20

25

30

35

30-Year80% Loan

Guarantees

Grants orInvestment Tax Credits

30-year ProductionTax Credits

$ billions


Deployment Challenges Met

Access to capital

High capital costs

Higher energy/fuel costs

Operating uncertainty

Federal budget impact

Climate concerns

80% federal loan guarantee

38% lower cost of capital

20-25% cost reduction

Funded reserves

Credit enhancements

Commercial CCS demonstration



Washington Politics

Senate Energy Committee (Domenici)

Senator Alexander

Administration

Environmental Groups

Industrial Gas Users

Electric Industry

Coal Industry

State Governors


william g. rosenberg 79 john f. kennedy street center for business & government belfer center...

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