Gasification Incentives

Transcription

1 Gasification Incentives Lynn Schloesser Eastman Chemical Company Session Chair -Incentives Workshop on Gasification Technologies March 2-3, 2006 DoubleTree Westshore, Tampa, Florida

2 Polygeneration Potential of Gasification Naphtha Power & Steam Waxes Fischer- Tropsch Liquids Diesel/Jet/Gas Fuels Synthetic Natural Gas Coal Gasification Synthesis Gas Methanol H 2 Iron Reduction Fuel/Town Gas Ammonia & Urea Dimethyl Ether VAM PVA Acetic Acid Ketene Diketene & Derivatives Acetate Esters Methyl Acetate Acetic Anhydride Ethylene & Propylene Oxo Chemicals Polyolefins

3 Session Overview Market/Policy Incentives Drivers EPACT 2005 Incentives Tax Credits Loan Guarantees State Incentives Ohio Klaus Lambeck, Ohio PUC NCSL Database Christie Rewey, NCSL State/Federal Coordination David Bradley, Governor's Office, New York

4 Market and Policy Drivers Natural Gas Market: Defects in Supply Constraints/Electricity Demand Growth Oil Market: Supply Limitations and Instability/Asian Demand Growth Regulatory Environmental Performance Utility Regulation Global Economic Competition Security

5 Market and Policy Drivers Natural Gas Market Defects Supply: access restrictions (Rockies, OCS) faster depletion rates Demand: electricity (130 GW NGCC "overbuild," 3.3 TCF "overhang") Response: closures, coal, petcoke, LNG, Alaska?

6 Projected Natural Gas Supplies TCF Canada & Mexico LNG Imports Lower 48 off-shore production Alaska 10 5 Lower 48 on-shore production

7 US Industrials hit by rising natural gas prices 7 Industrial Natural Gas Prices and Consumption Dollars per 1000 Cubic Feet Industrial Prices Industrial Consumption Billion Cubic Feet Year Source: EIA Monthly Energy Review

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9 World Fuel Shares Share of world primary energy consumption 50% 40% 30% 20% 10% Oil Coal Gas Hydro 0% Nuclear

10 Market and Policy Drivers Oil Market Supply: production/refinery limitations Demand: growth, (China, India) Response: GTL, CTL, Tar-Sands Regulatory Environmental Requirements: SOx, NOx, Ozone, Hg, CO 2 Electric Utility Regulation/Deregulation: CT, NGCC investments, overbuild, overhang

11 Market and Policy Drivers Global Economic Competition industrials (process steam, heat, H, efficiency, polygen) chemicals/fertilizer, paper, metals, glass majors (refineries, GTL) EOR agriculture (fertilizer, fuel) exception: electric power gas consumption

12 Security Drivers Energy/Military (DOD Assured Fuels Initiative (CTL)) vulnerability of centralized oil/gas infrastructure (e.g., Katrina/Rita) technology (fuel cells, H, FutureGen, BP Carson Refinery) distributed domestic natural resources (coal, shale, biomass) Food fertilizer fuels Materials?

13 Polygeneration Potential of Gasification Naphtha Power & Steam Waxes Fischer- Tropsch Liquids Diesel/Jet/Gas Fuels Synthetic Natural Gas Coal Gasification Synthesis Gas Methanol H 2 Iron Reduction Fuel/Town Gas Ammonia & Urea Dimethyl Ether VAM PVA Acetic Acid Ketene Diketene & Derivatives Acetate Esters Methyl Acetate Acetic Anhydride Ethylene & Propylene Oxo Chemicals Polyolefins

14 Federal Incentives EPACT 2005 Investment Tax Credits Loan Guarantees

15 Energy Policy Act of 2005: Title XIII Energy Tax Incentives Two New Investment Tax Credits (ITC) Section 48A: Qualifying Advanced Coal Project Credit Section 48B: Qualifying Gasification Project Credit Both are ITCs allowed during a taxable year for the qualified investment in advanced coal project or industrial gasification project, respectively.

16 Qualified investment Eligible property Part of qualifying project; For advanced coal projects using integrated gasification combined cycle (IGCC), "necessary for the gasification of coal;" and For industrial gasification projects, "necessary for the gasification technology." Placed in service by the taxpayer during the taxable year; Constructed by taxpayer or acquired by taxpayer before first placed in service; and Depreciable or amortizable.

17 Section 48A: Qualifying Advanced Coal Project Credit For integrated gasification combined cycle (IGCC) projects: ITC is 20% of the qualified investment. Cap of $800 million in total ITCs, which represents $4 billion of investment. For other advanced coal projects: ITC is 15% of the qualified investment. Cap of $500 million in total ITCs, which represents $3.33 billion of investment.

18 Qualifying Advanced Coal Project? Uses an advanced coal-based generation technology to power a new electric generation unit or retrofit/repower an existing electric generation unit; Fuel input is at least 75% coal (i.e., anthracite, bituminous coal, subbituminous coal, lignite and peat); and Has nameplate generating capacity of at least 400 MW. Applicant must also show: Expected that a majority of project s output will be acquired or utilized; and Ownership or control of a site large enough to accommodate project.

19 Section 48B: Qualifying Gasification Project Credit ITC is 20% of the qualified investment in qualified gasification projects. Cap of $350 million in total ITCs, which represents $1.75 billion of investment. Cap of $650 million of qualified investment per project that can be certified, which would provide $130 million of ITCs.

20 Qualifying Gasification Project? Uses gasification technology that converts coal, biomass or petroleum residue into synthesis gas composed primarily of carbon monoxide & hydrogen for direct use or subsequent chemical or physical conversion. Carried out by an eligible entity in applications related to: Chemicals Fertilizers Glass Steel Petroleum residues Forest products Agriculture

21 Double Dipping Allowed? Amount of qualified investment (and thus amount of the ITC) does not appear to be reduced for: Loan guarantees; Tax-exempt government bonds; and Grants.

22 ITC Reduction No Double Dipping Amount of qualified investment (and thus amount of the ITC) is reduced for: Subsidized energy financing financing under a Federal, state or local program a principal purpose of which is to provide subsidized financing for energy conservation or production projects; and IDBs proceeds of tax-exempt private activity bonds.

23 Process and Deadlines (Guidance of February 21, 2006) Generally DOE application due June 30, DOE certifies by October 1 Treasury application due October 2 Credits awarded by November 30 Taxpayer executes agreement by January 31 Service executes agreement by March 31 48A: 2 years evidence of turbine contract, permits; 5 years to place "in service" 48B: 7 years to place "in service" Rounds may occur in 2007 and 2008

24 Process and Deadlines (Guidance of February 21, 2006) 48A Selection Priorities (IGCC) projects demonstrating "greenhouse gas capture or increased by-product utilization" oversubscription: highest ratio of total nameplate generating capacity to requested allocation of credits coal allocation: $267 million for each rank: bituminous, subbituminous, lignite project limitation: $133.5 million 6 IGCC (also 4 non-igcc advanced coal projects)

25 Process and Deadlines (Guidance of February 21, 2006) 48B Selection Priorities (industrial gasification) priority projects: carbon capture capability, use renewable fuel, or have project teams with experience that demonstrates successful and reliable operations oversubscription: allocated to projects with highest ratio of total amount of synthesis gas to be supplied to by project ("nameplate capacity") to requested allocation of credits non-priority projects

26 Process and Deadlines (Guidance of February 21, 2006) DOE evaluation criteria 48A or 48B requirements demonstrated applicant ability to accomplish the technical objectives suitable site, control/ownership economic feasibility (submitted project development and financial plan) ability to meet "in service" deadline policy: geographical and technology diversity; environmental, economic, performance benefits

27 Process and Deadlines (Guidance of February 21, 2006) Issues ratio of nameplate to ITC amount (48A and 48B) eligible entity (48B) oversubscription criteria vague (48B) 2006 DOE deadline (48A and 48B) 48A applicants into 48B

28 Title XVII Loan Guarantees 80% loan guarantee for eligible projects IGCC, polygeneration, pet coke, liquefaction eligible facilities receiving tax credits are NOT precluded from receiving loan guarantees credit subsidy cost can be: appropriated paid up front by borrower IGCC project sponsors can apply previously appropriated grant funds toward subsidy cost defaults referral to Attorney General ability of secretary to service debt to avoid borrower default (line of credit?) no implementation timeframe

29 Overview of Loan Guarantees Definition: Any Guarantee, Insurance, or Other Pledge with Respect to the Payment of All or a Part of the Principal or Interest on a Debt Obligation of a Non- Federal Borrower to a Non-Federal Lender. Backing: Full Faith and Credit of the United States Interest Rates: 100bps Over Treasuries

30 Overview of Loan Guarantees (cont.) Benefits: Longer Debt Tenors Fully Amortizing Instrument Interest Rate Savings Access to Debt Capital Potentially Increased Project Leverage Policy-Driven Drawbacks: Federalization of Projects NEPA Davis-Bacon Lack of Alignment with Traditional Financing Practices Potentially Bureaucratic Application Process Relevant Examples: Transportation Infrastructure Finance and Innovation Loan Program (TIFIA) Title XI Ship Financing Program (Maritime Administration) Railroad Rehabilitation and Improvement Financing Program (FRA) USDA Business & Industry Loan Guarantee Program (Rural Development)

31 Potential Underwriting Criteria Statutory Requirements Reasonable Prospect of Repayment Adequate Project Capitalization 30 Year Maximum Term Senior Lien on Pledged Assets No Subordination Protect Interest of United States in Event of Default Reasonable Interest Rates Other Potential Requirements Project Credit Rating Funding and Maintenance of Reserves EPC Contracts w/ Adequate Performance Wrap Lender Qualification Requirements Maintenance of Adequate Collateral Project Ranking System Eligible Cost Restrictions Other Covenants

32 Application Process Typical Requirements Applicant Background Legal Entity History Lender Information Plan of Finance Sources & Uses Statement Financial Projections Capital Structure Working Financial Model Collateral Loan Terms Project Information Purpose Design Construction Plan Regulatory Requirements Feasibility Study/Business Plan Economic Financial Technical Market Legal Structure/Contractual Framework

33 Summary Title XVII gives DOE considerable flexibility OMB will play a key role in the program design industry should participate in the rulemaking process expect sound underwriting criteria absent appropriations, program will have limited appeal uncertain timing

34 Session Objectives Market/Policy Incentives Drivers EPACT 2005 Incentives Tax Credits Loan Guarantees State Incentives Ohio Klaus Lambeck, Ohio PUC NCSL Database Christie Rewey, NCSL State/Federal Coordination David Bradley, Governor's Office, New York