1. William G. Rosenberg 79 John F. Kennedy Street Center for Business & Government Belfer Center for Science & International Affairs Kennedy School of Government, Harvard University W: 617.495.0834 M: 919.601.0563 wrosenberg@e3ventures.com Gasification as a Strategic Energy and Environmental Option Project Contacts: Dwight C. Alpern Legal & Regulatory Issues Phone: (202) 343-9151 Fax: (202) 343-2356 Alpern.Dwight@epa.gov February 2005 Michael R. Walker Economic & Technical Issues Phone: (720) 842-5345 Fax: (720) 851-5784 mwalker@e3ventures.com Reports available at: www.ksg.harvard.edu/bcsia/enrp

2. Gasification as a Strategic Option 2 U.S. Coal, Pet-Coke, Biomass Resources Drivers Anthracite Bituminous Sub-Bituminous Lignite Coal Deposits Petroleum Coke Production Biomass Resources

3. Gasification as a Strategic Option 3 Global Climate Change Challenge 2004 U.S. CO 2 Emissions By Fuel Source World CO 2 Emissions 10 20 30 40 199020002010201520202025 United States W. Europe Other Industrial Fmr USSR /E. Europe China India Other Developing Source: EIA, International Energy Outlook 2004. Billion metric Tons CO 2 Drivers 5.8 billion metric tons CO 2

4. Gasification as a Strategic Option 4 Natural Gas Price Outlook Drivers

5. Gasification as a Strategic Option 5 96% of Capacity Built Since 2000 Natural Gas 50,000 100,000 150,000 200,000 250,000 300,000 1950's1960's1970's1980's1990'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

6. Gasification as a Strategic Option 6 TCF Demand from NGCC Fleet Drivers

7. Gasification as a Strategic Option 7 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 19971998199920002001200220032004 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

8. Gasification as a Strategic Option 8 Natural Gas Challenge Drivers

9. Gasification as a Strategic Option 9 U.S. Incremental Natural Gas Supply—LNG Imports Drivers

10. Gasification as a Strategic Option 10 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 CO 2  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

11. Gasification as a Strategic Option 11 IGCC Technology Source: NETL Shift & CO 2 Capture CO 2 Gasification Opportunities & Challenges

12. Gasification as a Strategic Option 12 Gasification offers clean alternative 0.5 1 1.5 2 SCPCIGCCNGCC NOxSO 2 PMHg ~80%95%+ NOxSO 2 PMHgNOxSO 2 PMHg ~0 lb/MWh Estimated New Plant Emissions Performance Gasification Opportunities & Challenges

13. Gasification as a Strategic Option 13 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 asset or We want to be the 5 th 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 Gasification Opportunities & Challenges

14. Gasification as a Strategic Option 14 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

15. Gasification as a Strategic Option 15 Gasification—Domestic Supply Option Deployment Incentives Gasification

16. Gasification as a Strategic Option 16 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 Deployment Incentives

17. Gasification as a Strategic Option 17 New Plant Cost of Energy Comparison 3.13 3.65 0.8 1.09 1 2 3 4 5 6 Traditional Utility Finance cent/kWh 5.02 5.54 IGCCSCPC 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. Deployment Incentives

18. Gasification as a Strategic Option 18 Lower fuel & electricity prices 1 2 3 4 5 6 7 1 2 3 4 5 6 7 EIA Projected 2005 Delivered Natural Gas Price Est. Manufactured Gas Cost with Federal Loan Guarantees NGCC Electricity Cost at EIA Natural Gas Price IGCC Electricity Cost with Federal Loan Guarantees $/mmBtu fuel costCent/kWh electricity cost 6.2 4.3 6.5 4.15 Deployment Incentives

19. Gasification as a Strategic Option 19 Federal budget cost NPV federal budget cost of equivalent incentives to support gasification equal to 1.5 TCF Deployment Incentives 2.2 11.8 32.4 5 10 15 20 25 30 35 30-Year 80% Loan Guarantees Grants or Investment Tax Credits 30-year Production Tax Credits $ billions

20. Gasification as a Strategic Option 20 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 Deployment Incentives

21. Gasification as a Strategic Option 21 Washington Politics Senate Energy Committee (Domenici) Senator Alexander Administration Environmental Groups Industrial Gas Users Electric Industry Coal Industry State Governors Deployment Incentives