Michael R. Walker Research Director IGCC Financing Project Kennedy School of Government, Harvard University PH: , FX: Financing IGCC for Near-Term Deployment September 2004 Report available at:

Financing IGCC 2 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

Financing IGCC 3 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

Financing IGCC 4 IGCC deployment rationale 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 Reconcile coal use and environmental protection

Financing IGCC 5 50, , , , , , 's1960's1970's1980's1990's'00-'02 Fuel Type MW Historic U.S. capacity additions

Financing IGCC 6 Natural gas price volatility Average Delivered Fuel Prices to U.S. Electric Generators

Financing IGCC 7 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

Financing IGCC 8 3-Party Covenant PUC Approved Revenue Stream Owner 20% Equity Investment Federal 80% Debt Guarantee IGCC Deployment

Financing IGCC 9 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

Financing IGCC 10 Traditional Utility Financing 80% Federal Loan Guarantee 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% Cost of capital with 80% federal loan guarantee 55% Debt (6.5%)

Financing IGCC 11 IGCC cost of energy with guarantee

Financing IGCC 12 PC vs. IGCC cost of energy with guarantee

Financing IGCC 13 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

Financing IGCC 14 Federal budget cost Budget Cost of 1 cent/kWh equivalent incentive (3,500 MW of IGCC)

Financing IGCC 15 State PUC participation Benefits  Low cost base load power  Low air emissions  Hedge against future CO 2  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

Financing IGCC 16 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